BIR Ruling No. 023-62

January 25, 1962 BIR RULING NO. 023-62 4th Indorsement Returned thru the Revenue Operations Head (Assessment), to the Chief, Investigation Division, the enclosed docket bearing on the income tax cases of the First National City Bank of New York. aisadc The records of this case show that the First National City Bank of New York. (Philippine Branches), a resident foreign corporation, is one of the six (6) banks denounced for tax evasion in a letter signed by Mrs. Luz Ventura Gorospe and Mr. Alfonso Tantoco, dated June 22, 1959. Accordingly, this Bureau referred the matter to Revenue Examiners M.N. Masakayan, Benjamin Maloles and Apolonio G. Santos, for verification and investigation. These aforementioned examiners, reporting on the result of their investigation, disallowed certain items of deduction particularly expenses and interest payments claimed by subject taxpayer in its income tax returns for 1954, 1955 and 1957. Likewise, the said bank was found liable for withholding taxes for the period covering the year 1954 to 1957. Subject taxpayer, in a memorandum dated October 10, 1957 through its counsel, Messrs. Ross, Selph & Carrascoso protested against the findings of our investigating examiners. Hence, this case is submitted to this Office for a ruling on the following disputed items. 1. HOME OFFICE EXPENSES Under section 30 of the Tax Code, three (3) conditions are imposed to be entitled to deductions, namely: (1) the expenses must be ordinary and necessary; (2) they must be paid or incurred within the taxable year; and (3) they must be paid or incurred in carrying on a trade or business. (Collector of Internal Revenue vs. Philippine Education Co., Inc., G.R. No. L-8505, prom. May 30, 1956). And the burden of proof that the expenses incurred are ordinary and necessary rests upon the taxpayer. (Alhambra Cigar & Cigarette Manufacturing Co. vs. Collector of Internal Revenue, C.T.A. Case No. 143, prom. July 31, 1956; 53 Off. Gaz. 3130). Expenses which are directly connected with and proximately resulting from carrying on the business and must be shown to be appropriate, and helpful in the development of the taxpayer's business for the acquisition or pursuit of income or profit. (Deputy v. Du Pont, 308 U.S. 488, 60s. Ct. 363; Welch v. Helvering, 290 U.S. 111., 78 L. ed. 212; Hicks vs. Collector of Internal Revenue, C.T.A. Case No. 38, prom. October 19, 1955; Gangcayco vs. Collector of Internal Revenue, C.T.A. Case No. 287, prom November 14, 1957). In a memorandum dated October 10, 1959, counsel for the First National City Bank of New York (Philippine Branches) claimed that the amounts of P455,011.99 and P454,702.90 represent the ratable shares of the Philippine branches in the home office expenses of the First National City Bank of New York, incurred in connection with the Philippine operations of said bank. The question that naturally comes up in: Were expenses necessary in the acquisition or pursuit of income or profit exclusively earned within the Philippines? It must be admitted that these expenses were necessary in the operation of the home office of the corporation, but it does not necessarily follow that they are the earning of the income derived exclusively from the Philippines. For all we know, the work performed by these officials and employees of the home office is mere duplication of the work being actually performed by the officials and employees of the local branches or offices. In other words, if the local branches were operating as separate and independent entities, would the local offices necessarily employ these people? The policies of the bank could very well executed by the local management. In fact, the promulgation of any policy or policies relative to the local branches could only be made upon a knowledge of local conditions, which only the local managers would be in a position to know and report to the home office, with proper recommendations. The supervision being handled by the Overseas Division could be handled expeditiously and efficiently by the local manager or management. The local branches must of necessity employ also their own comptroller, bank auditors and accountants to supervise the local branches. And these local officials and employees are in a better position to exercise the functions entrusted to them than those officials who must, to a large extent depend only on the reports and recommendations submitted and required from time to time by the home office. The employment of these personnel while obviously necessary to the home office, may not be necessary in the acquisition and earning of the local income. Hence, expenses for their maintenance in the home office should not be charged as a necessary expense allocable to the local branches. The disallowance, therefore, is proper. With respect to the travelling expenses of the bank's foreign staff, deduction of said expenses from the local branches should not be allowed. Such expenses were necessary to the home office in earning the world gross income but surely not the earning of the exclusively Philippine income. 2. EXCESS INTEREST The interest paid by the local branches of the bank deposits made locally should be deducted to their full extent as provided in section 30(b)(1), in accordance with B.I.R. Ruling No. 486, series of 1958, such interest are allowed as deductions from gross income under the last paragraph of section 78 of Revenue Regulations No. 2, which states: ". . .. In the case of banks and loan or trust companies, interest paid within the year on deposits or on moneys received for investments and secured by interest-bearing certificate of indebtedness issued by such banker loan or trust company may be deducted from gross income." (Emphasis supplied.) Considering that the interests sought to be deducted involve interests paid on local bank deposits, there allowance is proper. 3. WITHHOLDING TAX LIABILITY Investigations conducted in this case, disclosed that the First National City Bank of New York (Philippine Branches), through its New York Office, insured its properties in the Philippines with different insurance companies abroad. The insurance premiums were paid in advance by its home office and the local branch was charged with this expense. The premiums then were ultimately and actually paid by the bank's local branches. Pursuant to section 54 of the Tax Code as understood in the light of section 53 thereof, when premiums are paid here in the Philippines, the payor is under obligation to withhold the income tax due from a non-resident foreign insurance company not engaged in trade or business and has no office or place of business here in the Philippines. Accordingly, this Office is of the opinion that the First National City Bank of New York (Philippine Branches) is liable to the withholding taxes assessed against them by our investigating examiners. Appropriate assessment notices should, therefore, be issued against the taxpayer. LLjur MELECIO R. DOMINGO Commissioner of Internal Revenue